Go here to see the actual thread in which Blake framed the problem and the discussion that ensued. Here's how you might express the issue in the form of a question: how can App.net, with a straight face, ask independent developers for feedback, while at the same time insisting that App.net own any such feedback?

Any service provider with ambitions to become a platform will of course relish feedback, especially when that user is an accomplished outside developer who understands how the service works, technically, and who puts effort and imagination into fusing new applications onto the service.

That service provider will naturally covet the unrestricted ability to make use of feedback.

App.net took a wrong turn by publishing an overreaching covenant about developer feedback. Here's what it says, or said, in a version dated September 26, 2012:

Feedback

We love feedback. Please let us know what you think of the API, these Developer Terms and, in general, App.net. When you provide us with any feedback, comments or suggestions about the API, these Developer Terms and, in general, App.net, you irrevocably assign to us all of your right, title and interest in and to your feedback, comments and suggestions.

The right approach here is probably a license, rather than an assignment, from the developer.

Here's a suggested draft of a substitute feedback provision, using license language and already carrying the benefit of Blake's feedback:

Feedback

We love feedback. Please let us know what you think of the API, these Developer Terms and, in general, App.net. When you provide us with any feedback, comments or suggestions (collectively, "Feedback") about the API, these Developer Terms and, in general, App.net, you grant to us, under any right, title or interest you may have in and to such Feedback, a non-exclusive, royalty-free, worldwide, transferable, sub-licensable, irrevocable, perpetual license to use that Feedback or to incorporate it into the API, these Developer Terms, or any of App.net's products or services.

You'll recall that, among other things, the JOBS Act mandated that the prohibition on general solicitation and general advertising in Rule 506 offerings under Regulation D should be lifted and no longer apply, provided that all purchasers in the offering be accredited investors. Out of a concern that advertised offerings could generate more hype, Congress instructed the SEC to come up with "methods" by which issuers should "verify" the accredited status of the purchasers of its securities.

(Note: we are not talking about equity crowdfunding here. We are talking about a reform to the rule that governs the way most startups and emerging companies raise private money in the United States today. Essentially, we are talking about angel and venture capital fund investing.)

The Angel Capital Association's letter, written by its Executive Director, Marianne Hudson, expresses agreement with the SEC's position that the current Rule 506 be preserved as an option for issuers and their investors. The SEC proposed to codify this "quiet 506" (Joe Bartlett's term) as newly enumerated Rule 506(b). Assuming final rules are issued in the form currently proposed by the SEC, startups and emerging companies could conduct exempt offerings under Rule 506(b) and not face any new burden of "verification" of the accredited status of its investors. (Of course, issuers relying on Rule 506(b) would not be able to generally advertise or generally solicit, either. And they would have to follow the same practices used today for vetting investors' accredited status.)

As for issuers that do choose to engage in general solicitation or general advertising, the SEC has proposed a new Rule 506(c). Startups and emerging companies relying on Rule 506(c) (assuming the same is finalized as currently proposed) would have to take "reasonable steps to verify" the accredited status of its purchasers, and no non-accredited investors could purchase securities.

The most controversial aspect of the SEC's proposal has been its lack of any definitive safe harbor by which an issuer can be certain it has satisfied the amorphous "reasonable steps" standard of proposed Rule 506(c).

In its letter, the Angel Capital Association concurs with the SEC's judgment that leaving "reasonable steps" as an open standard "allows for advancements in verification methods over time."

However - and here we get to the thrust of the ACA letter - the Angel Capital Association believes that "safe harbors," categorical methods of verification that an issuer can have confidence in following, should be provided for "noisy" (Bartlett again) Rule 506(c) offerings that involve natural persons, that is, individual angel investors.

Here's a key quote from the ACA letter:

"Safe harbors are needed for companies and investors to act with confidence. Without safe harbors for 506(c) offerings, issuers won’t know when they’ve done enough to satisfy the 'reasonable steps' test. Issuers and investors will not be clear on liabilities or how rules will be enforced. This uncertainty will lead to conservative behavior. Many of our members tell us that, faced with concerns about liability, cost, or complexity in implementing the rules, they will limit their pace of investment in these offerings until the market sorts out the rules."

The ACA is not the only organization asking the SEC to come up with safe harbors or officially approved methods of accredited investor verification. If the SEC heeds the comments, we may see another proposed rule, and the lifting of the ban on general solicitation may be further delayed.

Disclosure: I serve on the Advisory Council to the ACA Public Policy Committee. The views I express on this blog are always my own.

I thought it would be fun to look "under the hood," so to speak, at the text of the legislation that Governor Jerry Brown signed this week, California Senate Bill 1298.

At the outset, we should note that the new law doesn't exactly legalize the widespread manufacture and distribution of driverless cars to ordinary people, at least not today. Rather, the law might be fairly said to be structured in the negative:

"Except as provided in subdivision (b), an autonomous vehicle shall not be operated on public roads until the manufacturer submits an application to the department, and that application is approved by the department pursuant to the regulations adopted pursuant to subdivision (d)."

This language is from subdivision (c) of the law, sitting between subdivision (b), the exception to the general prohibition, and subdivision (d), a provision that calls upon the California Department of Motor Vehicles to write implementing regulations "[a]s soon as practicable, but no later than January 1, 2015."

What the law appears to permit, more immediately, is the testing of "autonomous vehicles." Here is that subdivision (b), in pertinent part:

"An autonomous vehicle may be operated on public roads for testing purposes by a driver who possesses the proper class of license for the type of vehicle being operated if all of the [three, spelled-out] requirements are met."

The three requirements to be met, in summary, are: (1) the vehicle must be operated by someone "designated by the manufacturer of the autonomous technology," (2) a "driver" who is "capable of taking over immediate manual control" of the vehicle must be in "the driver's seat," and (3) the manufacturer must have $5,000,000 in insurance, and provide evidence of the fact "in the form and manner required by the department pursuant to the regulations adopted pursuant to subdivision (d)."

Now, I know I just implied that that a rulemaking process was going to hold up every day use of driverless cars for ordinary people – perhaps as far out as 2015 – but that driverless cars could hit the road, for testing purposes, right away. But look what’s in that third requirement: a statutory possibility that immediate testing of driverless cars in California could be held up for lack of regulations specifying what will count as proof of insurance.

A challenge with statutory law - not encountered in the development of common law, which emerges only slowly over the case by case course of court decisions - is in fixing, at the get go, language to circumscribe the behavior meant to be approved, permitted and/or regulated. The terms newly coined by a legislature in a statute are meant to have immediate legal effect.

You'll note that the term "driverless car" does not appear in any of the legislative text quoted so far. In fact, the adjective "driverless" is a misnomer. At least for purposes of the testing exception, the vehicle must have a driver sitting in the driver's seat and capable of taking back manual control, either from the computer or the operator with a joystick at the Googleplex. And at least the "driver" of the car (I'm not sure about the remote operator) must possess a driver's license.

For this statute, the key defined term is not "driverless car" but instead "autonomous vehicle."

The statute defines "autonomous vehicle" as "any vehicle equipped with autonomous technology that has been integrated into that vehicle." "Autonomous technology," in turn, "means technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator."

There's more fun and strange parsing to be had in this statute, and no doubt we'll return to the subject as the regs develop and other states consider similar legislation. I'll leave you with this inventory, from the new California law, of other automated features of the 21st Century automobile which are not, in and of themselves, indicia of an "autonomous vehicle."

"An autonomous vehicle does not include a vehicle that is equipped with one or more collision avoidance systems, including, but not limited to, electronic blind spot assistance, automated emergency braking systems, park assist, adaptive cruise control, lane keep assist, lane departure warning, traffic jam and queuing assist, or other similar systems that enhance safety or provide driver assistance, but are not capable, collectively or singularly, of driving the vehicle without the active control or monitoring of a human operator."

Oh the irony! The autonomous vehicle doesn't need you, driver, by its very definition; but it won't be legal for testing purposes unless you're sitting in the driver's seat, ready to make like Capt. Sullenberger and flip off the autopilot.

By http://profile.typepad.com/1237764140s22740 //
September 25, 2012
in Crowdfunding

We've had two posts this month on this blog about Kickstarter.

One by me, cautioning Kickstarter not to overreact to growing awareness of failed projects by stigmatizing failure. Then one this past weekend by Jonathan Sandlund, asking whether the newest Kickstarter policies may be over "over-optimizing for failure."

I bring my perspective as a private securities lawyer to the subject; Jonny brings his background from finance and his views as an equity crowdfunding evangelist.

The story started with Aarti Shahani's report on KQED radio in San Francisco, which morphed into a higher profile piece for NPR nationally.

In Shahani's first report, about a month ago, a Kickstarter founder reacts as though the company had never confronted the problem of a project that fails.

Circumstantially, at least, that initial innocence was belied by two quick rounds of changes to Kickstarter's terms (the first, commented upon in my post; the second, the focus of Johnny's post).

Over the weekend, Wired ran a story about projects that have disappeared from Kickstarter, the inference being that many or most were suspended after the company received DMCA takedown notices.

As Jay Parker said in a comment here yesterday, the dialogue would be helped immensely by some data on how long it takes for successful projects - success, to date, being defined as those that meet their funding targets - to deliver on promised benefits.

How Kickstarter navigates the pressure is important outside donation-based crowdfunding, too. Both those supporting and those opposing the equity crowdfunding exemption are watching.

No snideness or cynicism in this installment of the "My Favorite Risk Factors"TM series, but there are some interesting disclosures in Trulia's IPO prospectus to note:

Beware users who withhold or bear bad information. "Our success depends on our ability to provide consumers with the information they seek, which in turn depends in part on the content contributed by our users. We believe that one of our primary competitive advantages is the quality and quantity of the user-generated content in our marketplace, and that information is one of the main reasons consumers use our platform. If we are unable to provide consumers with the information they seek because our users do not contribute content, or because the content that they contribute is not helpful and reliable, the number of consumers visiting our website and mobile applications may decline."

Speed is of the essence. "[W]e update the listing information that we provide on our website and mobile applications on a daily basis. To the extent that we are no longer able to update information in our marketplace on a timely basis, or if consumers begin to expect updates in a more timely manner, we may be forced to make investments which allow us to update information with higher frequency. There can be no assurance that we will be able to provide information at a pace necessary to satisfy consumers in a cost-effective manner, or at all."

Need to diversity revenue base. "In each of the years ended December 31, 2010 and 2011, the ten largest advertising partners for the respective period accounted for more than 50% of our media revenue."

Single point of failure."Substantially all of the communications, network, and computer hardware used to operate our website and mobile applications is located at a single colocation facility in Santa Clara, California."

Patent fight with Zillow. "[O]n September 12, 2012, Zillow, Inc., or Zillow, filed a lawsuit against us in the United States District Court for the Western District of Washington, alleging that we infringe on one U.S. patent held by it. The lawsuit alleges that one component of our Trulia Estimates feature infringes upon Zillow’s patent insofar as Trulia Estimates allows homeowners to claim their homes and provide additional information about the properties, which enables us to update the valuation estimates for such properties. We started offering our Trulia Estimates feature in 2011. Zillow is seeking declaratory judgment that its patent is valid and enforceable, a permanent injunction against the alleged infringement, compensatory damages, and attorneys’ fees. This litigation could cause us to incur significant expenses and costs. In addition, the outcome of any litigation is inherently unpredictable, and as a result of this litigation, we may be required to pay damages; an injunction may be entered against us that requires us to change our Trulia Estimates feature; or a license or other right to continue to deliver an unmodified version of Trulia Estimates may not be made available to us at all or may require us to pay ongoing royalties and comply with unfavorable terms. Any of these outcomes could harm our business. Even if we were to prevail, this litigation could be costly and time-consuming, could divert the attention of our management and key personnel from our business operations, and may discourage consumers, real estate professionals, and advertisers from using our marketplace."

JOBS Act in action. "We are an 'emerging growth company,' as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an 'emerging growth company,' we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to 'emerging growth companies,' including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved."